Ukraine’s allies want to put a price cap on Russian oil. But there’s a problem: they can’t agree on a figure that would put pressure on the Kremlin.
The biggest Western economies agreed earlier this year to cap the price of Russia’s most valuable export and pledged to work out the details by early December. The move aims to reduce inflows into President Vladimir Putin’s war chest without adding pressure on the global economy by further reducing energy supplies.
But as the deadline approaches, countries are still negotiating where the cap should be set.
Media reports this week from a gathering of European diplomats indicated that Russian oil could be capped at between $65 and $70 a barrel. Still, this range is controversial, as it is close to the current market price of Russian crude. This would mean limited supply disruption, but also limited pain for Russia.
“At this price level, it’s about reducing inflation rather than reducing Russian income,” said Helima Croft, head of commodities strategy at RBC Capital Markets.
At the start of the month, a barrel of Russian Urals crude cost just over $70, about $24 less than Brent, the international benchmark.
Meanwhile, setting the price lower could exacerbate the global energy crisis, especially if Russia retaliates. If he were to cut production more than expected, it would drive up fuel prices, just as countries like the United States, Germany and Japan are keen to get inflation under control.
Putin said Thursday that Western plans to introduce oil price caps would have “serious consequences” for energy markets.
European Commission President Ursula Von der Leyen said on Thursday that she was “convinced that we will very soon agree to a global cap on Russian oil prices with the G7 and other major partners.” US President Joe Biden has said oil price cap talks are “ongoing”.
But the policy debate drags on, underscoring the complexity of the effort.
The countries want to reach an agreement before December 5, when the European embargo on Russian crude traveling by sea will come into force. Indeed, the EU sanctions package also includes a ban on providing insurance and other services to ships carrying Russian crude.
This would make it harder for Russian customers like China and India to continue importing millions of barrels a day. Most insurers that cover the transport of crude are based in Europe or the United Kingdom, which cooperates with Brussels.
The oil price cap aims to change this policy. Shipping services and insurance could be provided to tankers carrying Russian oil – as long as they are purchased at or below the ceiling price set by Western countries.
“This will contribute to further reducing Russia’s revenues, while maintaining the stability of global energy markets through continuous supplies,” the European Commission explained. “So it will also help fight inflation and keep energy costs stable at a time when high costs – especially high fuel prices – are a big concern.”
Still, setting a price proved tricky. Poland and other Eastern European countries want a lower cap, noting that it costs Russia much less than $65 to $70 to pump each barrel of oil. A ceiling between these prices would therefore allow Moscow to continue to profit from its crude sales.
Consulting firm Rystad Energy estimates the cost of production for Russia to be between $20 and $50 a barrel, depending on how the numbers are calculated.
Moreover, Russia’s budget forecasts that oil will be exported at an average price of around $70 a barrel in 2023. If it can get that price in the market, it could continue to spend mostly as planned.
Ukrainian President Volodymyr Zelensky said Friday the cap should instead be set at $30.
“We hear about [proposals to set the cap per barrel at] $60 or $70. Such words sound more like a concession [to Russia]he said via video link at a conference in Lithuania.
If the price is too low, however, Russia could go wild and cut production. That could shake up markets, given that Russia’s exports in 2022 stand at around 9.7 million barrels per day, according to the International Energy Agency. This is more than in 2021.
The price level is not the only problem to be solved. Setting a static range for the price cap — as opposed to setting a floating discount for Russian crude pegged to where Brent is trading — could pose logistical challenges, as it would need to be adjusted frequently.
According to Giovanni Staunovo, analyst at UBS, oil traders also doubt that the measure can be applied. He expects parties to transactions to simply look for loopholes.
“There is a strong urge to do something,” he said. “But the reality will be different.”
Some analysts believe that the price cap will ultimately be less important than the European oil embargo. The block has bought about 2.4 million barrels per day of Russian crude, and Moscow will soon be forced to seek new customers.
To limit spare barrels, he is likely to cut production. This could drive up oil prices no matter what.
“Due to the EU oil embargo and the expected cap in oil prices from Russia, oil production there is likely to be significantly reduced,” Commerzbank said in a note to clients. “This should drive the price of Brent oil higher in the coming weeks.”
– Clare Sebastian, Allegra Goodwin, Betsy Klein, Radina Gigova and Uliana Pavlova contributed reporting.
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